Landlords dangle incentives, trying to fill vacant office space

Press Photo/Jon M. BrouwerThe office building at 4055 Cascade Road SE has up to 82,000 square feet available and leases for $18.50 per square foot for 10-year leases only, with a $30 per square foot tenant improvement allowance.

GRAND RAPIDS -- Demand for office space in West Michigan grew slowly in the third quarter, but commercial real-estate agents agree economic conditions make it a tenant's market.

Incentives ranging from free rent to generous build-out allowances are being offered by West Michigan landlords hungry to fill space in buildings all over town.

A third-quarter market snapshot by Grubb & Ellis Paramount Commerce showed a vacancy rate of 17.4 percent for West Michigan.

That's up from a 15.9 percent vacancy rate reported in the third quarter of 2007 but down slightly from the second quarter thanks largely to Priceline.com signing a deal for a 45,000-square-foot call center in a vacant Wyoming building.

"One of the things we've seen is a general cautiousness in the market," said Chris Beckering, office adviser for Grubb & Ellis. "I can honestly say we've seen it as it relates to office products for the past two and a half years. We've seen tenants looking for shorter terms, downsizing their space, right-sizing their space, going for more economical space versus image type space."

Still, he expects moderate absorption over the next year because construction of office space has slowed dramatically and landlords are offering attractive incentives and rents.

"We're seeing some deals cut right now that are one- or two-year deals that I think are at below market rates but those deals are only being offered for very short terms," Beckering said. "The reason landlords are doing that is tenants are eager to find some savings but landlords are confident in the market improving."

Market conditions have gone from slow growth to standstill conditions in recent weeks, said Jim Decker, president of NAI West Michigan.

"Had you asked us six weeks ago where we saw the market, we would have said slow, moderate growth," he said.

"Today, it's like all bets are off. People have turned very cautious and very conservative."

Tenants in the market are in the driver's seat, said Mary Anne Wisinski-Rosely, director of office services with The Wisinski Group.

"There's a demand for all types of space, but I also find that people that are in the market for space are also looking for a really good deal because of what the market is like," she said.

Incentives to lease

Some landlords are offering a year's free rent.

Others are offering build-out allowances of $20 or more per square foot.

John Mundell, vice president with Signature Associates, likened the office market to the new car market. Deals out there today could disappear quickly as the market improves.

"It's a good time to consider upgrading your space or renegotiating your lease," he said.

More users, and even some investors, are looking at purchasing office space because the depressed real-estate market has made for some good long-term investment opportunities, Mundell said.

"We're seeing more influx of people from the east side considering investments here than I've seen in the past," he said.

"Traditionally, we've had a lot of buyers from Chicago. I think a lot of people realize there are some value plays in the state of Michigan."

David Wiener, office adviser with CB Richard Ellis, said he's seeing strong interest from area companies looking at consolidating in downtown Grand Rapids.

But, like the others, his outlook for 2009 is conservative.

"If we're predicting next year, that becomes a bit dicey," he said, noting the credit market and uncertainty with banks could slow deals and hamper landlords' access to capital improvement dollars.